Are the insolvency laws at fault in relation to the fraudulent activities of 'Lord' Hugh Rodley?

The story on pages two and three of today’s Sunday Telegraph on the fraudulent activities of ‘Lord’ Hugh Rodley raises two important questions for English insolvency law policy makers and the legislature. We are of course not fully aware of all the facts but, prima facie, the case raises two areas of concern: first, there seems to have been a failure in the investigation into the successive insolvent companies that Rodley was involved with, particularly in relation to the destination and clawback of monies that were dissipated from these companies. Secondly, the ability of individuals to gain repeated access to the statutory privilege which is the corporate form (concession theory policy makers?) is in itself alarming. I will call these two issues the investigation issue and the access issue respectively.

The investigation issue is very alarming as it seems as if Rodley was able to use the corporate form on a number of occasions to defraud various individuals. In this regard the Telegraph notes:“He took money from investors, moved it around, liquidated the companies and pocketed the money.”

How could this repeated misuse of company and creditors’ monies occur? Professor Otto-Kahn Freund’s partnership advocacy is certainly vindicated by this case! It could of course be the case that the fraud came to light because of the officeholder’s investigation activities. We do not know this at present. But what happened as regards the first company, or even the second company that was used by Rodley to facilitate the various frauds? What was the officeholder (in this case a liquidator and a trustee in bankruptcy as will be shown below) doing in relation to these companies and the fraudulent dispositions? In particular what were they doing regarding their statutory duties under the Insolvency Act 1986 (IA86) to investigate what had occurred at the company and where the money and assets had gone? The following tools are, inter alia, at their disposal:

Statement of Affairs - s.131 IA86

Duty to co-operate with the office holder - s.235 IA86

Public Examination - s.133 IA 86

Private Examination - s. 236 IA 86

Similar issues arise in relation to the role of Rodley’s Trustee in Bankruptcy as we are told by the Telegraph that:

“Neighbours said they were shocked at the scale of his fraud and by the fact that he was a bankrupt with a long record of offences including forgery and obtaining property by deception.”

The essential questions to ask are: have the insolvency laws been complicit in someway in allowing Rodley to continue with his fraudulent activities using successive companies? Should his fraudulent conduct have been spotted and possibly curtailed far sooner by either successive liquidators or his trustee in bankruptcy? Or indeed, have the insolvency laws provided a valuable function in spotting these frauds?

The second issue of note relates to repeated access to the corporate form. The access issue touches upon a piece of research that we are currently completing at CILP on behalf of BERR. We are examining the extent to which directors learn from the experience of being involved in a company that has gone into liquidation. In particular we are examining the so called ‘phoenixism’ phenomenon. The case of Ad Valorem Factors Ltd v Ricketts [2004] 1 All ER 894, prompts a consideration of the current state of insolvency law in relation to individuals involved in successive failed limited liability companies. Attention tends to focus on the so-called “phoenix” companies which, as a result of their use of names very similar to those of the original failed companies, appear to the outside world to be the original company “risen from the ashes”.

The Cork Committee, whose report in 1982 provided the basis for our current insolvency legislation, observed that the aims of a good modern insolvency law should include the provision of a framework of law for the governing of insolvency matters which commands universal respect. The Committee found evidence of a widespread view that the law was too indulgent in the case of a director who emerges from the wreckage of one company and trades immediately under the protection of another limited liability company. Despite this thirty-year old notion, Rodley seems to have been able to use successive companies. The Cork Committee made proposals for measures intended to combat this phoenix syndrome and some, but by no means all, were included in the IA86. The phoenix syndrome was described in evidence to the Cork Committee in the following terms:

"Companies are formed, debts run up, the assets milked and the company put into liquidation. Immediately a new company is formed and the process is repeated ad infinitum. Associated with the basic fraud is the practice of new companies buying the remaining stock of the old company at give-away prices, taking on the premises complete with fittings which are unpaid for, again at nominal prices. The new company, the “phoenix” which has arisen from the ashes, would often trade under the same or a similar name to the old company.”

We do not yet know if phoenixism was involved in the Rodley case, but if it was this, in light of the above, it makes the case even more alarming. Future blog entries will attempt to address the above issues in more depth, particularly in relation to the Rodley case and the role of the officeholders in the successive companies in which he was involved.

The insolvency laws are of course no stranger to the idea and practice of fraudulent behaviour. This sort of conduct has occurred in the context of both miscreant directors, but also allegedly miscreant IPs (see JIMU comments below). Whilst the contents have to be handled with some care and objectivity, the work of Austin Mitchell MP, Professor Prem Sikka, et al, entitled: Insolvent Abuse: Regulating the Insolvency Industry (2000), makes illuminating reading in this regard. Similarly, Stephen Aris' book: Going Bust: Inside the Bankruptcy Business, (Coronet, London, 1986) is also not to be missed. Both publications provide a fascinating glimpse into the pre-Corkian, and indeed post-Corkian, world of insolvency.

In terms of IPs the Joint Insolvency Monitoring Unit (JIMU) was set up in 1994 to provide an independent monitoring process for IPs with the findings from the visits being passed to the RPB’s for subsequent regulatory action. The biggest issue for JIMU was the inconsistent approach of the RPBs on essentially similar issues. This caused friction between the RPBs and led to forum shopping by IPs. Each RPB runs its own regulatory function and the majority use volunteer IPs to man their committees and pass judgment on the IPs being reviewed. Unfortunately, it could be argued that personalities and other vested interests meant that the process was not always even handed. Action was inevitably delayed when miscreant IPs were being reviewed. JIMU was disbanded in 2003 after arguments about funding. Each of the RPBs took the process in house resulting in a wide variety of different processes being implemented. The original intention had been that JIMU’s long term funding would be provided from the profits of the profession’s captive insurance company set up to provide the insolvency profession with bonds required by the regulations. This never happened and continual cost cutting by the RPBs reduced the manpower and effectiveness of the unit before its’ final demise in 2003.